DOE Acquisition Guide

Chapter 34.1 (June 2005)

PROJECT MANAGEMENT AND THE ACQUISITION OF

MAJOR SYSTEMS

Guiding Principle:

9 Sound planning and management

of DOEs contracts for the
acquisition of projects are essential to
the success of the Departments
missions.

Applicability:

This section is applicable to projects as defined by DOE Order 413.3 under the
responsibility of elements of the Department of Energy. However, the principles,
concepts and guidance may be applied to other project-like work scopes, as
appropriate.

References:

DOE Order 413.3, Program and Project Management for the Acquisition of
Capital Assets
DOE Manual 413.3-1, Project Management for the Acquisition of Capital Assets1
DOE O 361.1 Acquisition Career Development Program
OMB Circular A-11, Part 7 Planning, Budgeting, Acquisition and Management
of Capital Assets
DOE P 413.1 Program and Project Management for the Planning, Programming,
Budgeting and Acquisition of Capital Assets
DOE Acquisition Guide, Chapter 42.5, Contract Management Planning
DOE Acquisition Guide, Chapter 70.7, Reference Book for Contract Administrators,
Chapter 1, Project Management
Federal Acquisition Regulation Part 34, Major System Acquisitions

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DOE Acquisition Guide, Chapter 70.8, Appendix B, DOE Performance-Based

Contracting Guide
Office of Engineering and Construction Management Information Center Website:
http://oecm.energy.gov

What Is the Purpose of this Section?

The purpose of this section is to set forth guidance for contracting professionals on the
appropriate planning and management of DOEs contracts for the acquisition of major
systems as they are implemented as projects under DOE Order 413.3 and DOE
Manual 413.3-1. The chapter will cover, from the point of view of contracting
professionals, the following areas:

how project management requirements are incorporated into contracts,

the contracting officers responsibilities relating to managing contracts for the
acquisition of projects,
the importance of Contract Management Plans in managing contracts for projects,
how the project management life-cycle relates to contracting professionals,
what to consider when making contracts for the acquisition of projects
performance-based,
the importance of having reliable project performance data,
how contracts which support projects relate to the budgeting process,
the Earned Value Management System, and
project management training requirements.

What is the Background Information You Need to Know?

The Department has applied the discipline of project management to its acquisition of
major systems at DOE. The Departments missions are supported by major systems
acquisitions ranging from projects for the construction of scientific research facilities
to the building of vitrification plants for the processing of toxic waste. To complete
these projects successfully, safely and within budget, the Department has significantly
revised its project management policies and practices to increase accountability,
require effective up-front planning, improve performance measurement, and manage
risk within the Departments acquisition management system. DOEs projects are
among the most challenging in the world because they are frequently one of a kind
using complex systems and technologies in a first time application. Obviously, this
requires rigorous planning at the inception of a project and skillful management
throughout the life-cycle of the project.

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On June 25, 1999, the Deputy Secretary directed a DOE-wide initiative to reform the
way the Department manages projects by strengthening accountability for project
performance, and thereby, improving project performance. The following summarizes
the actions that the Department has taken since 1999 to strengthen its project
management capabilities:

1. Established and strengthened the corporate project management organization in

the Office of Management, Budget and Evaluation/ Chief Financial Officer to
strengthen project management direction and oversight.

2. Established project management, tracking, and control systems.

3. Established the Chief Operations Officers (COOs) Watch List for projects with
significant issues or emerging problems.

4. Strengthened line management accountability for project management results.

5. Established greater contractor accountability for project management.

6. Revised the criteria and funding processes related to DOE projects.

7. Developed a longer term program for institutional capacity building including the
training of project management and contracting professionals in aspects of project
management (including the Earned Value Management System).

What is the Guidance Contained in this Section?

Although the basic principles for contracts for the acquisition of projects are similar to
those of other contracts, there are some points which need to be stressed. Contracting
professionals will find in the following pages guidance on key areas of which they
should be familiar in planning and managing contracts for the acquisition of projects.

1. How are project management requirements incorporated into

contracts?

In order to explain how project management requirements are

incorporated into contracts, we must first make a distinction between
the contracts which are required to employ the clauses in Part 970 of the
Department of Energy Acquisition Regulation (DEAR) and those which
are not. The Departments management and operating (M&O) contracts (as well as
certain facility management contracts, when appropriate) use the clauses at DEAR
970. DEAR clause 970.5204-2, "Laws, Regulations, and DOE Directives," is used, in
part, to incorporate the requirements of DOE directives into contracts. This list of
specified DOE requirements must appear in the contract as List B.

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All M&O and other prime contracts containing requirements for projects at
DOE facilities with a total project cost greater than $5M must contain DOE
O 413.3 incorporated through List B of DEAR 970.5204-2. The
requirements of the order which are applicable to contractors are contained in the
Contract Requirements Document which is an attachment to DOE O 413.3.

The key elements of DOE O 413.3 to be required of contractors through the Contracts
Requirements Document are:

1. Implementation of the industry standard for project control systems described in

American National Standards Institute (ANSI) EIA-748, Earned Value Management
Systems for a total project cost (TPC) greater than $20M.

2. Reporting to DOE of cost and schedule performance, milestone status, and financial
status on a monthly basis using DOE-approved work breakdown structure elements and
data elements for all projects with a TPC greater than or equal to $20M, except for time
and- materials contracts, firm fixed-priced contracts, or level-of-effort support contracts,
for control of project performance during the project execution phase.

3. Submission to the contracting officer for concurrence of a written Acquisition Plan that
is appropriate for the requirement and dollar value of each subcontract for the
acquisition of a project and consistent with the intent of the FAR for contracts that will
be accomplished by M&O/M&I contractors,

4. Reporting to DOE of technical performance analyses and corrective action plans for
variances to the project baseline objectives resulting from design reviews, component
and system tests, and simulations.

5. Submission to DOE of a critical path schedule and a project master schedule.

6. Performance of cost estimating must be an integral part of cost baseline and life-cycle
cost development and maintenance, budget request development, and estimates at
completion.

7. Identification, quantification, and mitigation (as appropriate) of project technical, cost,

and schedule risks. Risk mitigation strategies must be developed and implemented.

8. Development and maintenance of an integrated contractor technical, cost, and schedule

baseline.

9. Establishment of a configuration management process.

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10. Utilization of a value engineering process.

11. Development and implementation of a quality assurance program for the contract scope
of work in compliance with DOE O 414.1A, Quality Assurance

12. Development and implementation of an Integrated Safety Management system.

13. Application of sustainable building design principles to the siting, design, and
construction of new facilities.

Those contracts not subject to incorporation of DEAR 970 clauses, but which are for
the acquisition of projects as defined in DOE O 413.3, must have the appropriate
project management requirements, including EVMS, incorporated through a special
contract requirements clause (i.e., a section H clause}.

2. What are my responsibilities, as the contracting officer

(CO), relating to managing contracts for the acquisition of
projects?

Prior to award, the CO, as part of the integrated project team

discussed in DOE O 413.3, must ensure that, to the extent
applicable, project management requirements (including the
Earned Value Management System) are addressed during the acquisition planning
phase. The CO is responsible for ensuring that all requirements for the acquisition of
the project including DOE O 413.3 are incorporated into contracts and requests for
proposals for the acquisition of projects. These requirements include, but are not
necessarily limited to, the project statement of work, delivery requirements, reporting
requirements, the Earned Value Management System (EVMS) and applicable quality
and inspection requirements. The Contract Requirements Document attached to the
order sets forth when the EVMS is applicable to the contract.

Contracting Officers must ensure that, when an offeror is required to submit an EVMS
plan as part of its proposal, the plan is determined to be adequate pursuant to
ANSI/EIA Standard 748. The contracting officer must provide the Plan to the Federal
Project Director for evaluation.

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After award, the CO is responsible for:

ensuring compliance with the terms of the contract including the submission of the
EVMS plan and reports,
notifying the contractor, as appropriate, of the adequacy (or deficiency) of the
EVMS plan,
notifying the contractor, as appropriate, of the requirement to conduct an
independent baseline review,
safeguarding the interests of the contractual relationships,
requesting and considering advice of specialists in audit, law, project management,
engineering, and other fields, as appropriate,
monitoring performance, and
enforcing the Governments rights when necessary.

Ultimately, the CO is responsible for enforcing the terms of the

contract and requesting corrective action as necessary. In fulfilling
this responsibility it is extremely important that the CO maintains a solid
relationship with the Federal Project Manager and stay abreast of project
performance under the contract in order to address deficient or endangered
performance when it occurs. In accomplishing all of this, the CO relies on subject
matter experts for information on contract performance, technical and legal analysis,
advice on the integrity of the project management system, etc.

Success depends on good contract management planning and execution,

and an integrated and communicative management team! Effective
administration of performance-based contracts relies heavily on the
integration efforts of groups of people representing many functional areas,
customers, and stakeholders. Past problems can sometimes be traced to lack
of an integrated effort in managing contract performance.

Key tools for the management of such contracts are :

The Quality Assurance Surveillance Plan,
The Contract Management Plan, and
Earned Value Management

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You can find a more in-depth presentation of your roles as and responsibilities as a
contract administrator related to contract management and project management in
Chapter 1, Project Management, of the Reference Book for Contract Administrators
and on the DOE Procurement and Acquisition Homepage at:
http://management.energy.gov/policy_guidance/procurement_acquisition.htm

You can also find two excellent video presentations on contract management planning
and EVMS as it relates to contract administration on the DOE procurement and
acquisition home page. When you get to the website, click on the hot-link entitled,
Oversight of Performance-based Contracts DVD, and it will take you to
presentations on both Effective Contract Management Planning for Performance-
based Contracts and Using Earned Value Management for Better Contract
Administration.

3. What should Contract Management Plans contain relating to

projects?

Basically, work related to projects is treated the same as any other

work under the contract when it comes to contract management
planning. Projects should be thoroughly reviewed for all of the
considerations delineated in DOE Acquisition Guide chapter 42.5,
Contract Management Planning, and those considerations should be scrupulously
addressed in the Contract Management Plan including, but not limited to:

the roles and responsibilities of all the key member of the Integrated Project Team
including how they should interact to effectively manage the requirements,
the project schedule,
reporting requirements,
quality and inspection requirements,
configuration control
the risk mitigation plan, and
government furnished services, property and information.

4. How does the project management cycle affect my job as the Contracting Officer?

It is imperative that the contracting officer understands how his or her responsibilities relate
to the life-cycle of projects and ensures his or her participation on the Integrated Project
Team from the very earliest stages of a project. The following paragraphs will demonstrate
how the different phases in a projects life relate to the contracting officers responsibilities.

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Project, financial, budget and contract planning, implementation and management processes
are all interrelated. They support and rely on each other during the acquisition process.

For example:
We couldnt issue a solicitation prior to knowing the Federal (or DOE) required
performance parameters for a project. Clear documentation of project requirements at
CD-1 form the basis for the design and engineering project phase.
How we determine the most appropriate type of contract for a solicitation is dependent
on considering the project risks. An initial risk management plan is developed as part of
CD-1.
How we structure contract deliverables and options in a solicitation depends on our
understanding of the mission need date, project milestones and budget process. Project
cost and schedule milestones are baselined at CD-2. The project funding profile is
submitted to Congress in the Project Data Sheet after CD-2 approval.

A word on funding: Since FY2003, DOE has used Project Engineering and
Design (PED) funds. PED funds are used only for design purposes for the
preliminary and final design. PED funds are not to be used for construction,
long-lead procurement or major equipment items. The Department receives two
appropriations which may be used for the acquisition of capital assets: Operating Expense
and Capital Construction. Depending on the project and its state, the budget requests, along
with the Capital Asset Plans and project Data Sheets will contain a request for one or both
types of funds in a fiscal year.

Detailed explanations and formats for preparation of budgets and the direction regarding
what funds are to be identified for specific types of efforts are found in the DOE's Budget
Formulation Handbook. Additionally, the Field Budget Call is available to DOE Federal
employees on the Office of Budget intranet website at:

http://crinfo.doe.gov/officedocs/me30/

This guidance supplements guidance provided in the Field Budget Handbook.

There are a number of project related actions in which contracting officers must become
involved in order to ensure that projects are executed properly and in a timely matter. Early
involvement by the contracting officer is required and will help to ensure that the actions
and documents needed to procure the project are produced in a timely manner. The
following table shows the relationship among the different project phases, the critical
decision points, project funding and the major actions which may be conducted under each
phase.

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The Contracting Officer and others on the IPT need to understand at least a few basic ties
among contract, budget and project planning. The table on the following page shows the
relationship among the different project phases, the critical decision points, project funding
and the major actions which may be conducted under each phase.

PROJECT LIFE CYCLE

INITIATION DEFINITION EXECUTION PHASE TRANSITION

PHASE PHASE CLOSEOUT
PHASE

CD-0 CD-1 CD-2 CD-3 CD-4
Approve Approve Approve Approve Approve
Mission Alternative Performance Start of Start of
Need Selection Baseline Construction Operatio
and ns or
Cost Project
Range Closeou
t

Use Operating Funds/Program Use PED Funds Use Project Funds
Funds

Major Actions: Major Actions: Major Actions: Major Actions: Major Actions: Major Actions:
Strategic Planning Conceptual Design Preliminary Develop or Draft solicitations, Manage the
Present Performance Report Design acquire the Final contracts or contract and
Assessment Requirements Analysis Performance Design modifications project
Performance Alternatives Analysis Baseline Acquisition Plan* Conduct the acquisition Closeout the
Requirements Analysis Systems Engineering & Project Develop process contract
Alternatives to Capital Value Management Execution Plan Documents to Award and/or
Assets Planning support contract/modification project
Mission Need Statement Preliminary Risk solicitations, Manage the contract Transitioning
Identified in Terms of Analysis contracts or and project & Turnover to
Capability Acquisition Strategy modifications Execute the Project Operations
Preliminary Project
Execution Plan
*as required for
contracts by the
Federal
Acquisitions
Regulation

Note: Actions, in bold above, may require involvement of the contracting officer as part of the
Integrated Project Team.

Depending upon how the project is developed, some or all of the above activities may be
covered under a single contract or under multiple contracts. For example, the Government
may perform the Preconceptual Planning but want a contractor for design (conceptual,
preliminary and final) and a separate contractor for construction and yet another for
operation. Alternatively, all of the activities may be covered under a single contract like a
Management and Operating (M&O) contract, where the major site or facility management
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contractor actually initiates the project planning, design, construction and operation, with
some or all activities possibly subcontracted by the M&O contractor.

Following is a discussion of the various critical decision points in the projects life and the
major responsibilities of the contracting officer relating to those critical decision points.

a. Critical Decision-0, Approve Mission Need

Critical Decision-0 (CD-0), Approve Mission Need, formally establishes a project and
initiates a requirement for project status reporting. The DOE Project Assessment and
Reporting System (PARS) provides a web-based system to report project status. Starting at
CD-0, project status is reported monthly utilizing the PARS, and the Acquisition Executive
begins conducting quarterly progress reviews.

Develop an Acquisition Strategy (Following CD-0 Approval)

The acquisition strategy must be developed early during the Definition Phase prior to
approval of Critical Decision (CD)-1, Approve Alternative Selection and Cost Range.
The approved Mission Need will have identified the range of acquisition alternatives.
As the concept evolves and alternatives are investigated, an acquisition strategy must be
developed that will provide the conceptual basis for the plan a project will follow during
its execution. A carefully developed and consistently executed strategy is key to a
successfully executed project. An important early step in acquisition planning is the
identification of the Integrated Project Team (IPT).

An acquisition strategy is a high-level business and technical management approach

designed to achieve project objectives within specified resource constraints. It is the
framework for planning, organizing, staffing, controlling, and leading a project. It
provides a master schedule for activities essential for project success and for formulating
functional strategies and plans. The acquisition strategy must reflect the
interrelationships and schedule of acquisition phases and events based on a logical
sequence of demonstrated accomplishments, not on fiscal or calendar expediency.

It cant be stressed enough that adequate time must be allowed for the various
phases of the project cycle and the acquisition actions which will arise from it.
Artificially trying to expedite the timelines beyond what is prudent can have
detrimental results for the acquisition and the project.

The acquisition strategy conveys the Integrated Project Teams (IPT) approach for the
successful acquisition of the project, its intended outcomes, and rationale for that
approach. The contracting officer must be a member of the IPT. The approach should
address, in part, market conditions, effective use of competition, and performance based
contracting opportunities. Chapter 5, Definition Phase, of DOE M 413.3-1 discusses
in-depth the types of information and analysis which will go into the acquisition strategy
and also presents the format for the acquisition strategy.
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b. CD-1, Approve Alternative Selection and Cost Range

Key activities that take place leading up to Critical Decision-1 include alternative and
requirements analysis, conceptual design, development of an acquisition strategy,
evaluation of project risks, hazards analysis, systems engineering, and value
management.

At the conclusion of the concept exploration process, the alternative selected as best
solution to a mission need is presented to the Acquisition Executive for approval (CD-1
approval). While a range of costs, schedule, and performance bound the
solution/alternative, there is no committed or approved baseline until the design matures
when estimates and schedules can be defined with an acceptable degree of certainty.
The approval package must include a description of alternatives considered, risks, life-
cycle costs, trade studies, development efforts, and testing requirements. Approval of
the alternative selection and cost range (CD-1) authorizes the beginning of preliminary
design work.

Complete Acquisition Planning (Following CD-1 Approval)

Acquisition planning is the process of identifying and describing requirements and

determining the best method for meeting those requirements. On major acquisitions,
participants include the Federal Project Director, Contracting Officer, technical experts,
logisticians, financial and legal personnel. However, this team can be tailored to meet
specific project needs, but the CO must always be an active participant.
Acquisition planning focuses on the business and technical management approaches
designed to achieve project objectives within specified resource constraints and the
contracting strategies necessary for implementation.

A distinction needs to be made between the acquisition strategy as discussed in DOE M

413.3-1 and acquisition planning as discussed in the Federal Acquisition Regulation.
DOE M 413.3-1 requires an appropriate acquisition strategy for projects. However, that
does not mean that all projects will have acquisition planning and an acquisition plan as
described by the FAR. Acquisition plans are prepared for contracts or classes of
contracts. However, there are times when a project will be implemented by a contractor
under a major site and facility management contract, and an acquisition plan will not be
appropriate.

In such cases, when the prime contractor is responsible for executing subcontract
acquisition planning, the Integrated Project Team should review the plans for significant
procurements in collaboration with the prime contractor. On some contracts, the
acquisition plans for significant subcontract procurements are required to be submitted
to the government for review prior to announcement.

When an acquisition plan is required for a contract, it must be completed as early in the
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acquisition cycle as possible. Federal Acquisition Regulation (FAR) 7.102(b) states that
the purpose of acquisition planning is to ensure that the government meets its needs in
the most effective, economical, and timely manner. Guidance on writing Acquisition
Plans for contracts is contained in Chapter 7 of the DOE Acquisition Guide. Integrated
Project Teams use acquisition planning as an opportunity to review and evaluate the
entire procurement process, so that sound judgments and decision making will facilitate
the success of the overall project. Specific contract acquisition planning should be
appropriate and proportionate to the complexity and dollar value of the requirement. A
plan for each contemplated contract or class of procurements should address the
significant considerations of the procurement action. An acquisition plan may cover
more than one contract. The contract acquisition plan represents the Integrated Project
Teams agreement for conducting the procurement. The written acquisition plans are
comprehensive and intended to facilitate attainment of the acquisition objectives by
addressing milestones and other significant considerations that will control the
acquisition. In preparing the Acquisition Plan, the information contained in the Project
Acquisition Strategy and the Project Execution Plan must be considered and utilized.
The Federal Project Director has overall responsibility for acquisition planning when the
Department will directly contract for the acquisition. Understanding the major technical,
cost, and schedule project risks to successful completion of the project is a significant
factor for the Integrated Project Team decision makers.

Develop the documents needed to support procurement of the project requirements

(between CD-1 approval and CD-3 approval)

During the Execution Phase (which encompasses CD-1, CD-2 and CD-3) shown in the
previous table, actions are being taken and documents are being developed which will
define the technical requirements which will eventually be incorporated into the
procurement package for procuring the requirements for construction of the project. The
contracting officer must be involved, to the extent necessary and practicable, to ensure
that the documents which will support the eventual procurement of the project
requirements are adequate and produced in a timely manner. The various phases of the
project cycle are explained in more detail in DOE Manual 413.3-1.

Preliminary Design (following CD-1 Approval)

Evolving the conceptual design into the preliminary design provides the depth and detail
to allow the project asset to take shape and form. Preliminary design initiates the
process of converting concepts to a design appropriate for procurement or construction.
This stage of the design is complete when it provides sufficient information to support
development of the Performance Baseline. During this phase, PED funding may be used
to procure the preliminary design of the project. The contracting officer should work
with the IPT to ensure that all requirements for the preliminary design are adequately
described to place under contract whether through adding the requirements to an existing
contract such as a major site and facility management contract or through a competition.
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c. CD-2, Approve Performance Baseline

When the design is at a level of maturity and the project is able to define the Performance
Baseline with some certainty, the project is submitted to the Acquisition Executive for
approval to formally establish the Performance Baseline (CD-2 Approval). The
Performance Baseline is the original baseline for the project and is used to prepare and
submit project budget requests and capital asset plans to Congress and Office of
Management and Budget. The Performance Baseline defines the key parameters for the
project, including the performance parameters, technical scope, schedule, and cost to clearly
establish the capabilities being acquired along with the total cost and schedule.

Final Design (Following CD-2 Approval)

Final design is the last phase of development prior to contractual implementation of the
project requirements. The purpose of the Final Design Phase is to prepare final drawings,
technical specifications, and all the other components which will comprise the solicitation
and/or contract documents required to obtain bids and quotes for procuring the requirements
for construction. The final design should also include clear statements of testing
requirements and acceptance criteria for the safety and functionality of all subsystems. The
project scope should be frozen and changes should be permitted only for compelling
reasons, (i.e., substantial economies achieved through value engineering, accommodation of
changed conditions in construction, reduction in funds or changes in requirements). During
this phase, Project Engineering and Design (PED) funding may be used to procure the final
design of the project. The contracting officer should work with the IPT to ensure that all
requirements for the final design are adequately described to place under contract whether
through adding the requirements to an existing contract such as a major site and facility
management contract or through a competition. If early construction funding is approved,
long lead items may be procured prior to CD-3 to support projects if those long lead items
were addressed in the approved acquisition stratetgy.

Documentation (statements of work, specifications, etc.) necessary to support the

later preparation of the request for proposals, contract modification, etc., should be
initiated during the final design phase so that shortly after approval of CD-3,
Approve Start of Construction, a procurement package is ready for award.

It is imperative that the Contracting Officer is a participating member of the

Integrated Project Team and communicates to the other IPT members what is
needed to timely produce the required contractual documents for procuring
the project requirements on schedule.

d. CD-3, Approve Start of Construction

CD-3 approval provides authorization to complete all procurement and construction and/or
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implementation activities and the planning, implementing, and completion of all acceptance
and turnover activities. This authorizes the project to commit all the resources necessary,
within the funds provided, to execute the project. Prior to approval of CD-3 no project
construction funds may be used. However, once CD-3 is approved, a contract for the
construction of a project may be awarded. Consequently, depending upon the need and
schedule for the project, the IPT must be ready to issue solicitations, contracts or
modifications shortly after CD-3 approval.

Once the contract is awarded or the requirements are placed under an existing contract,
the contracting officers responsibilities regarding contract administration and management
come into play. It is especially important for the contracting officer to understand the
mechanisms which are used to monitor performance under the project, i.e., the earned value
management system (EVMS). As discussed earlier in this chapter, the EVMS is a tool for
monitoring and measuring performance under the project and it performs as an early
warning system alerting us to potential problems under the project.

5. In making contracts for the acquisition of projects performance-

based, what strategy should I follow?

Basically, the strategy for making contracts for the acquisition of projects
performance-based is similar to the strategy that you would use for any other
contract:

Form a team to analyze the requirement

Analyze the requirement and identify the objective(s)/mission of the contract
including how to measure success
Examine how others have handled similar requirements
Construct a performance-based statement of work
Identify those critical objectives which require incentives
Select the contract type which best fits the requirements
Construct performance and schedule incentives in accordance with applicable
guidance (see the FAR, DEAR and the DOE Acquisition Guide)
Ensure that cost incentive(s) and/or cost constraint(s) exist that make prudent
business sense and comply with the regulations and guidance ensure that cost
incentive(s) and cost constraint(s) work to constrain the incurrence of costs under
performance and schedule incentives under the contract
Document in writing your decision rationale regarding whether or not to construct
performance and schedule incentives and cost incentives or cost constraints
dedicated to individual projects under the contract

6. Should projects have individual performance or schedule incentives under

the contract?

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Maybe! It depends on the situation. When determining the incentive structure of the
contract, evaluate how the project(s) relate to the overall objectives of the contract.

Projects may be incorporated into contracts in two different ways. First, a contract
may represent as its sole mission the accomplishment of a single project. In such a
case, the contract has been executed to achieve the project. An example of such a
contract could be the construction of an individual building or facility. The question
whether or not to structure incentives for the successful completion of the project in
this case is easy. Since accomplishment of the project means accomplishing the
objective of the contract, the answer is a resounding YES!

When a contract contains one or more projects but the contracts sole mission is not
the accomplishment of the project or projects, the question becomes more complex.
In such cases, each project must be examined and evaluated to determine if it merits
the construction of an incentive. An example of such a scenario could be a site
cleanup contract which contains a number of projects.

If the project(s) represent intermediate efforts or milestones leading to the overall

achievement of the objective of the contract (i.e., closure of the site), then the
objective of the contract (and not the individual projects) may be all that requires
incentive(s). If, however, individual project(s) are of critical significance in
comparison to other work under the contract, then assignment of incentives to those
projects may indeed be advisable.

Remember! The DOE Performance-Based Contracting Guide states,

Fee is to be tied to those critical few performance measures or group of
measures which are necessary to successful accomplishment of the
performance objectives. Construct incentives only for those projects and
other work where the analysis indicates that such incentives are absolutely required.

Chapter Five of the DOE Performance-Based Contracting Guide provides general

factors to consider when making the decision whether or not to construct incentives.
Please read Chapter Five for a more in-depth discussion of the following factors.
Developing incentives will depend on a number of considerations of which the
following list forms only a part:

The inclusion of cost incentives if other incentives (e.g. performance, schedule, etc.) are
to be included.
The adequacy of the contractor's accounting system and the ability of that system to
segregate and track costs.
The degree to which the performance measures and/or metrics can be defined.
The definitiveness of the baseline.
Importance of the task to the achievement of the program.
The degree of additional benefit obtained by the government if the baseline performance
level is exceeded.
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The degree to which additional increases in the level of performance of a performance
measure become harder to obtain and thus more costly.
The degree to which the attainment of a level of performance of a performance measure
is within the contractor's ability.
The degree to which the DOE obtains benefit from the performance of a performance
measure in an incremental versus a continuous fashion.
The degree to which continued incentives are important.
The degree to which offering incentives for some performance measures may be to the
detriment of others.

The decision you make is basically the same type of decision which is made whenever
the contracts scope of work is examined to determine what should be incentivized
and what should not. However, the decision whether or not to assign incentives to
individual projects must be made on a case by case basis for every major system
project as defined in DOE O 413.3 as you would whenever considering incentivizing
work under the contract. The decision whether or not to assign incentives to other
projects (less than major system projects) should be made on a case by case basis as
practicable.

7. If a performance incentive has been assigned to an individual project, does

the contract need a cost incentive or cost constraint?

First, what do the regulations say? FAR 16.402-1(a) states, in part, that No
incentive contract may provide for other incentives without also providing a cost
incentive (or constraint). FAR 16.402-4(b) states that a properly structured multiple-
incentive arrangement should: Compel trade-off decisions among the incentive
areas, consistent with the Government's overall objectives for the acquisition.
Because of the interdependency of the Government's cost, the technical performance,
and the delivery goals, a contract that emphasizes only one of the goals may
jeopardize control over the others. Because outstanding results may not be attainable
for each of the incentive areas, all multiple-incentive contracts must include a cost
incentive (or constraint) that operates to preclude rewarding a contractor for superior
technical performance or delivery results when the cost of those results outweighs
their value to the Government.

In short, if a contract has a performance or schedule incentive then that

contract (but not necessarily the project) must have a cost incentive or cost
constraint AND that cost incentive or cost constraint must, at the very
least, cover the work which bears the performance or schedule incentive.

8. OK, if we have a performance or schedule incentive on the project, do we need

a cost incentive or cost constraint dedicated to that project?

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The answer to this question is: The question of whether or not to include a dedicated
cost incentive depends on the individual situation. The regulations require a cost
incentive or constraint in the contract whenever a non-cost incentive is used. If the
contract contains only a single cost incentive or constraint, then it must cover all of the
work which has been assigned schedule or performance incentives. For example, if
the contract has multiple performance or schedule incentives on projects and other
work, if it is a cost-plus-incentive-fee contract (CPIF), and if the CPIF arrangement
covers all work under the contract, then no other cost incentives or constraints would
be required.

Thats what the regulations say. Now you must ask yourself: What makes
good business sense?
Although projects have measures under the Earned Value Management System to
monitor and manage performance and cost progress, it may make prudent
business sense to also construct a cost incentive or constraint specifically for the
project(s) under the contract.

One situation where it would be prudent to establish a cost incentive or cost constraint
for a project is when the incentive structure of the contract is not adequate to contain
of the costs to be incurred under the project or where success in limiting costs is of
such critical importance as to merit a separate cost incentive or constraint. An
example of such a situation would be where a major new research facility was being
constructed at a laboratory under the M&O contract for the facility. In this
circumstance success under the project may be so distinct from success under the rest
of the contract as to merit separate incentives including the application of a cost
incentive or cost constraint.

Under non-DOE acquisitions, the sole purpose of a contract may often be the
implementation of a single project, i.e., construction of a building. Under those
circumstances, a cost incentive would be dedicated to the project. However, at DOE,
a single site or facility management contract may contain the requirements for a
number of projects. An example would be a contract for the closure of a site which
contains requirements for several projects related to clean-up, waste disposal, and site
closure. The requirement may be structured as cost-plus-incentive-fee (CPIF) contract
with closure required by a date certain. Under this example, all of the projects would
work in concert to close the site by the required date and the single cost incentive (the
CPIF contract structure) would be sufficient to contain or incentivize costs under the
contract including all of the projects.

9. How do we ensure that incentive fee awards are based on

reliable performance data?

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Whenever we award fee under the contract, we must have confidence that the initial cost
estimates (target cost, etc.) and the incurred cost or performance data, on which we base our
decisions or calculations, is accurate. The initial cost estimates or targets (the baselines
from which we measure performance) for contracts are established in one of two ways.
First, such cost estimates or targets may be established through the competitive process.
Offerors propose such costs, those costs are subjected to a cost realism analysis, compared
to a government estimate and the competitive process itself, if conducted properly, ensures
the reasonability of the costs.

Secondly, such cost estimates or targets may be proposed by a contractor in a sole source
situation without the market forces of competition honing the proposed costs. In such cases,
the contracting officer must ensure that the proposed costs are analyzed, negotiated and
determined to be reasonable before they can be the basis for measuring performance. Such
analysis and validation of baseline costs can be conducted by outside organizations such as
the Defense Contract Audit Agency, the DOE Office of the Inspector General, or in the case
of External Independent Reviews arranged by OECM, they may be conducted by an outside
contractor. Additionally, baseline costs may be validated by teams put together the program
offices. For example, the Office of Environmental Management (EM) regularly reviews and
validates site Integrated Life-Cycle Baselines and Contract Project Baselines. The criteria
for the EM reviews include, but are not limited to, cost estimation, scope definition, project
schedule, earned value management system, performance metrics, regulatory requirements,
and government furnished services and items.

Establishment of valid baselines is only one aspect of ensuring that the performance data for
contracts and projects is accurate and reliable. We must also ensure that the costs and
performance data accumulated over the life of the contract or project is also accurate. Cost
and labor hour data is accumulated under all contracts through contractors accounting
systems. So, first, the contracting officer must ensure that the contractors accounting
system is adequate for the type of contract under which it will perform. As FAR 16.104(h)
states, before agreeing on a contract type other than firm-fixed-price, the contracting officer
shall ensure that the contractor's accounting system will permit timely development of all
necessary cost data in the form required by the proposed contract type. This is a matter of
the contractors responsibility which must be determined prior to awarding the contract.
FAR 9.104-1 states that in order to be determined to be responsible, a prospective contractor
must, among other things, have the necessary accounting controls or the ability to obtain
them.

In order to help reduce any over-reliance on contractor data and baselines which havent yet
been analyzed and validated, contracting professionals should, to the extent practicable,
participate as members on program office reviews of contractors baselines and EVM
systems. However, the External Independent Reviews of contractor baselines for which
OECM contracts are, by definition, reviews which are conducted by independent entities
outside of the Department and are not open to participation from the Department.

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Remember! Earned Value Management Systems, which comply with

American National Standards Institute (ANSI) EIA-748, are required on
those projects with a total project cost greater than $20 million. The requirement is
contained in the Contract Requirements Document attached to DOE O 413.3.

10. How are contracts supporting projects tied to the budgeting process?

There are several important contracting and project management areas closely tied to the
budgeting process. A few of the major points are summarized below. More detailed annual
budget guidance is posted in the Field and CRB-OMB Budget Guidance posted at:

http://crinfo.doe.gov/officedocs/me30 (DOE access only).

Integrated Project Team members should be aware of this guidance to help improve contract
and project planning.

In March 2005, the Office of Budget (ME-30) issues guidance to prepare the FY 2007 Field
Budget Call. This guidance reflects updates based on the latest policies and reporting
requirements from appropriations language and other sources. This guidance may address
such issues as how Decontamination and Decommissioning costs for facilities being
replaced are treated as part of the project. Project data sheets are the primary documents
used to defend funding for real property capital projects exceeding $5 million regardless of
the funding source. A project data sheet is submitted for new project efforts and for ongoing
projects that require Congressional appropriations. They are the primary documents used to
defend funding for capital projects throughout the budget formulation process.

All projects requesting Project Engineering and Design (PED) funds must have an approved
Critical Decision - 0. Approval of a project CD-0 allows budget submission for PED funds.
However, PED funds may not be obligated on a contract until after approval of CD-1.

All projects with a Total Project Cost (TPC) greater than $20 million, must have
performance baselines validated by OMBE/OECM.

To support the budget process, a project must be baselined at CD-2 by August 2005 to
submit a Project Data Sheet for FY 2007. Under DOE O 413.3, the Performance Baseline is
established at CD-2 following validation that includes an External Independent Review. In
general, projects are not validated until completion of preliminary design. Project data
sheets and conceptual design reports are required prior to project validation. Performance
baselines for all projects greater than $20 million in TPC must be validated by
OMBE/OECM in order to request construction funding. Some exceptions may be necessary
to adequately address budget cycle impacts on the project. Coordinate exceptions with

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Chapter 34.1 (June 2005)
OMBE/OECM. No construction funds may be obligated until CD-3 approval, unless an
early authorization for long lead construction items has been approved.

For the FY 2007 budget cycle, ME-30 issued a combined CRB-OMB Budget Call the end of
March 2005. ME-20, ME-90 and others provided updated planning guidance. This budget
guidance may address such areas as General Plant Projects and Major Items of Equipment.

The Federal Acquisition Streamlining Act of 1994, Title V requires agencies to establish
cost, schedule and measurable performance goals for all major acquisition programs and
achieve on average 90 percent of those goals. This is implemented by:

OMB Circular A-11, Part 7, Planning, Budgeting, Acquisition and Management of

Capital Assets;

DOE M 413.3-1 Project Management for the Acquisition of Capital Assets; and

OECM's tracking of project cost and schedule performance through the Project
Assessment and Reporting System throughout a project's life-cycle with monthly
reporting to senior management.

Data from the project data sheets are used to develop the OMB Circular A-11 Project Status
Report to meet performance reporting requirements of FASA and A-11.

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11. Where did Earned Value Management come from?

The concept of using Earned Value Management to monitor performance of work has been
around for over thirty years. The goal has been to monitor a projects progress and to
attempt to project whether the project would be successful. Initially, Earned Value was
used by industrial engineers on factory floors in the early 1900s to attempt to measure
"cost-performance" efficiencies. This was done by comparing the earned standards (the
physical factory output) against the actual costs incurred. Then they compared their earned
standards to the original planned standards (the physical work they planned to accomplish)
to assess the schedule results.

In the 1960s this basic concept was picked up by the Department of Defense (DOD).
Initially, DOD developed a system referred to as Program Evaluation and Review
Technique (PERT), which was then followed by a revised program entitled PERT/Cost.
PERT/Cost was an important step towards todays EVMS as for the first time, it began to
measure what was physically accomplished against what was spent. PERT/Cost was
eventually abandoned and was replaced with the Cost/Schedule Control Systems Criteria
(C/SCSC) concept. These various concepts were mandated for use by industry in DODs
contracts. However, in the mid-1990s, industry became involved in the design and
requirements of the earned value program and the present day concept of EVMS was born.
To establish a true standard for use by industry and the Government, ANSI/EIA 748-98
EVMS was developed in 1998, adopted by DOD in 1999, and it is how we implement
EVMS today for Government projects.

12. How does the contractors Earned Value Management System (EVMS) relate to
its accounting system?

In order to be able to use EVMS for effectively measuring the contractors performance
under a DOE project, the contractor must first have a cost accounting system which is
capable of segregating the costs of a project from any other costs under the contract.
Additionally, the accounting system must be able to break down and track those costs at a
sufficiently detailed level (work breakdown structure) to adequately measure progress under
the various tasks which comprise the project.

In order to award a contract, the contracting officer must determine in

advance of award that the offerors accounting system is adequate to
record costs incurred under the contract. The contracting officer will use
the Defense Contract Audit Agency and/or a pre-award survey to make
this responsibility determination in the case of FAR-based contracts and
will use the DOE Chief Financial Officers organization and/or the Office
of the Inspector General audit function in the case of an M&O contractor. The adequacy of
the contractors accounting system is a matter of contractor responsibility (as defined in the
Federal Acquisition Regulation) which is determined before awarding the contract.
However, the adequacy of the contractors EVMS (as determined by certifying that the

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EVMS complies with ANSI/EIA-748) is a matter of contract management - not a matter of
contractor responsibility.

The EVMS is a little like a manufacturing plant. The accounting system

accumulates the raw material (financial and labor hour cost data) and
organizes it. The EVMS combines that raw material with data on project
performance, manipulates it and repackages it into a number of different
products which give us a snapshot in time regarding where the project
currently is compared to where it was in the past and where it should be if on schedule and
within cost. These products are extremely useful to project managers and contracting
professionals in managing contracts for the acquisition of projects and in timely anticipating
problem areas. In order for the EVMS to successfully manipulate the data to measure
performance under the project, it must be compliant with the industry standard
ANSI/EIA-748-98/

The contractor uses EVM to control cost and schedule performance as well as to
report progress against the contract. DOE uses EVM to monitor and verify
progress on contract (project) costs and schedule performance, monitor
and validate contractor accomplishments on specific fee and PBI
incentives, and as an early warning system to identify deficient progress.

13. If the EVMS is not yet approved, does this mean that cost targets negotiated for
the contract will not be accurate?

Absolutely not! Cost targets, such as comprise the elements of cost-plus-

incentive-fee or other types of incentive contracts, are usually negotiated
prior to contract award using the data from the contractors accounting
system. The EVMS takes the data from the accounting system and
manipulates that data in a meaningful way to produce information for measuring progress
under projects. Whether or not the EVMS is approved at that time has no bearing on the
accuracy of the accounting system data which is used for establishing those targets.

14. What about those contracts which use the EVMS to determine interim fee
payments?

On some DOE contracts, the EVMS is used to determine interim (provisional) fee
payments based on performance progress. Final fee payments are based on
completion information not necessarily from the EVMS. However, under those
contracts which do employ the EVMS for making interim fee payments, it is

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important to ensure that the EVMS system is compliant with the industry standard
ANSI/EIA-748-1998 to make sure that interim payments are made on an accurate basis.

To the extent practicable, contracting professionals should participate on

the teams which will evaluate the contractors EVM Systems for approval.

15. Under contracts with projects, which indirect work-related

activities should be considered in awarding contractors fees?

Recently, during a review of contracts with projects by the

Government Accountability Office (GAO), the question came up if
the Department should be more specific regarding which indirect
work-related activities should be considered in awarding
contractors fees and which should not. What the GAO meant by indirect work related
activities are those activities which support the work under the contract but which may not
be directly related to accomplishing the mission of the project. Such indirect work-related
activities might be the submitting of reports on time, maintenance of site infrastructure, the
efficient conduct of business operations, etc.

The question regarding whether to consider such indirect work related activities when
awarding fee will vary from contract to contract depending on various factors, including, but
not limited to, the type of contract, the contracts mission, individual site conditions, other
areas incentivized under the contract, etc. Contracts which have a single mission such as the
closure of a cleanup site may focus fee entirely on achieving the cleanup and closure of the
site and may exclude the consideration of indirect work-related activities when awarding
fee. Indeed, some EM environmental cleanup contracts are focusing fee entirely on the
cleanup operations.

However, not all DOE contracts have such focused missions. Contracts for the general
management and operation of a site or facility may also contain requirements for the
execution of one or more projects. These contracts with a more diverse mission may
consider the performance of such indirect work-related activities in the awarding of fee if
those activities are considered to be of such a high priority, compared to other work at the
site, as to merit such consideration. An example of such an activity might be the
improvement of site infrastructure (buildings, roads, etc.) when the improvement of that
infrastructure is of such relative importance as to merit focusing the contractors efforts on
it. However, such indirect work-related activities are normally considered through a
subjective award fee structure.

Chapter Nine of the DOE Performance-Based Contracting Guide (PBCG), already

specifically addresses this subject with regard to contracts for research and development:

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Chapter 34.1 (June 2005)
In moving to performance based award fee contracts, the Department has emphasized
the need to create objective performance measures for the performance of support
functions (such as facilities management, property management, financial management,
etc.), but has de-emphasized associating those measures with fee. The rational for this is
that while it is important to have measures in place for the performance of support
functions as a management tool, the major focus of the contractor should be on mission
specific work, and it is with this [that] fee should be associated. Further, often in order
to successfully perform mission work, the support work must be performed to at least a
satisfactory level. This applies to all the Departments contractors including those
managing and operating the Departments laboratories (in the case of the laboratories the
mission work is science and technology). Therefore, unless there is a problem with a
support area or a need to emphasize a critical support area, fee should only be associated
with the performance of support functions in a general subjective award fee fashion.
[emphasis added]

Chapter Five of the PBCG discusses in a broad manner constructing performance measures
and incentives. The chapter recognizes that there is no single approach which can be
applied to constructing measures and linking fee to work efforts (including indirect work-
related activities). Instead of attempting to prescribe a particular method for constructing
measures and incentives, it provides general factors to consider in making those decisions.

16. Where can I get training for contracting professionals on

project management?

DOE Order 361.1 requires the course, Project Management

Overview, for all contracting professionals in order to attain a
Level III certification.

As mentioned earlier in this chapter, you can find a more in-depth presentation of your
roles as and responsibilities as a contracting professional related to contract
management and project management on the DOE Procurement and Acquisition
Homepage at:
http://management.energy.gov/policy_guidance/procurement_acquisition.htm

When you get to the website, click on the hot-link entitled, Oversight of
Performance-based Contracts DVD, and it will take you to excellent presentations on
both Effective Contract Management Planning for Performance-based Contracts and
Using Earned Value Management for Better Contract Administration.

Any GS-1102 requiring certification to Level II who has responsibility for a project
which requires an earned value management system must take a course in Earned
Value Management in order to attain that certification. All GS-1102s are required to
take a course in Project Management for certification to Level III. A list of individual
courses and training providers which are satisfactory for meeting the level II and III
training requirements is provided in Acquisition Letter 2005-07.
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Additionally, for those who want more in-depth training on the various aspects of
project management, there are a number of courses on the subject listed in the CHRIS
catalog at: https://mis.doe.gov/ess/training_catalog.cfm?sort_by=reg&skey=none.

17. Conclusion:

This chapter brings together a number of different issues with regard to forming and
administering contracts for the acquisition of projects. The decisions that you will
make regarding constructing measures and incentives for projects are basically the
same types of decisions which you would make when structuring any performance-
based contract. More information on applying performance-based contracting
approaches and techniques is found in the DOE Performance-Based Contracting
Guide. The Departments main sources of guidance on projects are DOE Order
413.3, Program and Project Management for the Acquisition of Capital Assets and
DOE Manual 413.3-1, Project Management for the Acquisition of Capital Assets.
Other excellent sources of information may be found within the documents mentioned
in the References section of this chapter.

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